Characteristics of Zero-Coupon Bonds

Very Hard Fixed Income Securities Types Of Bonds

Consider a corporate bond issued by a company with a significant amount of variable-rate debt. The bond is structured as a zero-coupon bond, which means that it does not pay periodic interest payments and is sold at a discount to its face value. Given the nature of the bond and the company’s financial environment, which of the following characteristics would be most likely associated with this type of bond?

The bond will likely exhibit lower price volatility compared to fixed-rate bonds due to its zero-coupon nature.

The bond may be highly sensitive to interest rate changes, resulting in greater duration risk.

The bond offers immediate cash flow benefits to the investor due to its structure.

Hint

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